Wanted: financial advice that is genuinely independent

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THE MOST dangerous market for consumers is financial services. Part of the difficulty is that the sellers seem so respectable - companies such as Northern Rock, once an old-fashioned building society; Legal & General, a byword in the City for caution; Prudential Assurance, who gave us the phrase "the man from the Pru".

Yet Northern Rock has just had to pay out pounds 3m in backdated interest to customers who complained that they had not been warned about changes to their savings accounts. Legal & General has set aside pounds 600m to compensate victims of the pension mis-selling scandal.

And the Prudential? After it had earmarked pounds 1.1bn to compensate 190,000 customers who were sold inappropriate pension schemes, this week comes evidence that its sales people are still selling unsuitable policies. The chief executive, Sir Peter Davis, was reported to be breaking his holiday to handle the incipient crisis.

As a safeguard, financial institutions employ compliance officers to make sure that sales staff follow their rules. The Pru's "compliance director" said he was confident that the mis-sold policies would have been spotted. In fact, I think the whole process of "compliance" deceives as much as it protects. It misleads managers of financial institutions into thinking that their sales forces are well controlled, and it falsely reassures customers.

The reality is this. Sales people always focus on selling those products that earn them the highest commission. Commission rates are set by management. Thus when customers are sold inappropriate pension schemes or other financial products, the entire blame should be directed at managers, and at the board of directors above them.

As it happens, the Pru is in the process of changing its commission structure to one that provides more reward for achieving a long-term relationship with the customer. This confirms that the key determinant of sales force activity is how management sets the commission structure. And that in turn is why it is appropriate that the police are investigating the actions of certain insurance company directors. Given that as many as 2 million people may have been mis-sold pension policies, it would be astonishing if nobody ended up in court.

More than in any other industry, there seems to be a wide divergence between the interests of the producers (in this case the producers of financial services) and the customers.The reason why this wide difference has developed is the difficulty customers have in assessing quickly whether they have bought the right financial service or product.

Typically there may be a gap of 20 to 30 years between the first payment of premiums into a pension scheme, and retirement. As far as life assurance is concerned, terms of 10, 15 and 20 years are common. Investors in the stock-market, whether directly or through unit trusts, are told to look at least five years ahead. And even when the moment of truth is reached and the first pension payments are received, or the life policy matures, few people think it worthwhile to find out whether their original decision was wise; it is far too late to put it right.

Of course, league tables of past performance are common, and much used by sales people when it suits their case. But knowing today, say, which life assurance companies have produced the best results for policies arranged 20 years ago is not much of a guide to how a new policy, started this year, will perform between now and 2018.

For these reasons, purchasers of financial products have great difficulty in establishing whether they have been well or badly served. In response, the Government is mounting a massive advertising campaign to alert recent buyers of pension products to the possibility that they may have been misled.

What improvements to this unsatisfactory state of affairs can be proposed? In the first place, financial institutions can be structured so as to close the gap between the interests of the company and those of customers.

These are mutual societies. Many were founded in the 19th century. They are organised on the footing that the customers themselves own the institution. Many of them are household names, such as Scottish Widows and Standard Life. Until a few years ago, all building societies were mutual organisations, but members, seeing that handsome reserves had been built up over the years, have in many cases chosen to convert their institutions into banks and grab the surplus. The Nationwide building society has just avoided this fate.

I have recently become a non-executive director of a mutual organisation, the Tunbridge Wells Equitable Friendly Society. When I stood for election to the board at the annual meeting in June, I was asked to make a speech outlining my views about the friendly society movement and the society itself. The audience comprised the society's customers, not shareholders. It was they who would elect me or not. Indeed the society does not refer to customers as such; instead they are called "members". There is a unity of purpose. That is why Frank Field, when he was a government minister, constantly espoused the virtues of mutual organisations.

I realise that shareholder-owned financial institutions cannot be changed back into mutual societies. But the Government can encourage mutual societies in many ways, particularly with regard to taxation.

The trouble with financial regulation is that the financial services market is, in one important respect, back-to-front. So-called independent financial advisers, a sector that controls 55 per cent of the market in investment and insurance products, are remunerated not by the customers but by the financial institutions themselves.

In a perfect world, independent financial advisers would act as agents, seeking out the best deal according to individual circumstances, and charging a fee for the work, as a solicitor or an accountant does. In such a scenario, mis-selling of pension plans would be rare, if not unknown. But, in practice, independent financial advisers are remunerated by commission from the companies whose products they recommend. Consequently, the best way for an insurance company to raise the sales of its financial products is to increase the commission it is willing to pay - regardless of what its past record may be.

Financial regulation has no power to correct this distortion. At the very least, while this system persists, financial advisers should be forbidden to describe themselves as independent. "Independent" is precisely what they are not.

In short, the financial services market is going to remain treacherous. If readers will forgive a self-interested plea, I think much the best advice is to be found in the financial pages of the newspapers themselves. I would rather read Nic Cicutti in The Independent, or Gillian O'Connor on the back of the Financial Times on Saturdays, or The Guardian, which exposed the Prudential this week, or Lorna Burke in The Sunday Telegraph, than put myself into the hands of an independent financial adviser. Indeed, I couldn't do it.

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